Wise investments

Padma Ramakrishnan, TNNOct 15, 2005, 12.22PM IST

The increasing trend towards buying a second home can be attributed to the buoyancy in the real estate market, which has altered investment opportunities. The middle and upper middle class are viewing it as a safe investment vis a vis gold and the stock markets. The real estate market is seen to give comfort as part of the overall investment. A second home is directly linked to job confidence, increase in salary and growth.

It is also dictated by the need to move into bigger houses as affordability improves. The first house is retained as an investment. Sanjay Dutt, Director - Commercial and Residential Agencies, Cushman and Wakefield says that during the past few years, growth in the residential sector has been established. The movers are the middle class who have never seen this growth.

They see this as an opportunity for safe investment. Job confidence allows them to pay their loans in a short period, and hence allows them to take another risk by way of going for a second loan. The money made from booking profits in the stock market is invested in the real estate as investors too associate property as a more safe and reliable investment. The higher class are going in for much more advanced amenities.

Second homes are also motivated by leisure. Hence people buy properties in Lonavala, Khandala, Mahabaleshwar and so on. N Mohan, a businessman who bought his farmhouse in Khandala three years ago says, "I bought it mainly as a weekend getaway from the busy city life. Travelling to Khandala from Chembur is faster than travelling to Fort every day. When I bought it, I primarily saw it as a break from the routine. Now however I see that my investment has appreciated mainly due to the Mumbai-Pune Expressway , which has made this place an attractive option for many. I bought it for about Rs 650 per sq yard, now I am told the price is around Rs 1,100 per sqyard. A few of my friends too have bought property here."

Canfin Homes Chief Manager T Bakthavatchalam says that in the early 1990s with interest rates prevailing at 17%, the eligibility of a person was half of what it is now.

Interest rates today have enhanced the repayment capacity of a person. The benefits from income tax too, were also not so much. A person would get a rebate of only Rs 30,000 , and income tax benefit on principal amount was only Rs. 10,000. Today, however, income tax benefits on interest can be availed till Rs 1.5 lakh. A person can go for a second home or create an asset without a tax liability on it.

The rental income from the first flat can be used to pay the EMI for the second flat. He can thus create an asset by squaring off his loan, with the money from his rental income. For instance, if a person gets annual rental income of, say, Rs 1 lakh on his first home, 30% of it would go towards standard deduction in maintenance, property tax etc. His rental income would thus be Rs 70,000.

If he has taken a loan of, say, Rs 10 lakh for his second home, his yearly interest payment would be Rs 75,000. Thus his rental income takes care of his EMI payment and helps him retain two properties without being taxed on the income. He is thus able to create an asset on rent and is not taxed for it. People opt for second homes in their ancestral town or in cities like Hyderabad, Coimbatore, Mysore, Pune etc. Second homes are also seen as a retirement option, where you move into a smaller city.

In the early nineties, 80% demand was investor driven while 20% was actual user driven. Today it is the reverse. With population growing, the demand will continue. Since the need for immediate occupancy is not the criterion, the location of the second home and the infrastructure in the area are not all too important in many cases. A case in point is S Sridhar, a Vashi resident, who went in for a second home in Niljey, near Dombivali.